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The European Union’s push to rearm in the face of growing external threats and the increasing disengagement of the United States has, so far, been primarily a push to spend more on defence and to find ways to facilitate that spending. This has led Germany, for example, to break with its budgetary balance dogma, while the European Commission has decided to exclude national defence spending from European Union fiscal rules.

These developments are undoubtedly positive. However, two mistakes must be avoided, the bottom line being that unless the EU becomes more innovative, there cannot be any real security, including in terms of its defence. 

The first mistake would be to fail to understand that today’s power dynamics hinge just as much on economic and technological factors as they do on purely military considerations. China has become the primary concern for the United States mainly because of its impressive economic growth and spectacular technological advancement since the 1980s. China has already reached the technological frontier in several fields, notably generative artificial intelligence, an area in which the EU severely lags behind both China and the US.

The EU’s response to this should not be simply to catch up. Instead, it must choose specific innovative trajectories that are compatible with its climate transition targets and its goal of safeguarding the European social model. It should capitalise on its leadership in clean technologies.

Budget cuts and regulatory restrictions imposed by the Trump administration on US researchers in areas such as biology and clean energy present a unique opportunity for the EU to improve its innovation capability. The EU should work to attract US-based researchers who have expressed their misgivings about US policy through the  movement. However, this means European countries will need to increase investment in fundamental research significantly – they currently invest half as much as the US.

The second mistake would be reverting to outdated industrial policies – governments allocating public funds to specific enterprises selected as ‘national champions’. In particular, the EU lacks institutions comparable to US Advanced Research Project Agencies (ARPAs). The ARPA model is straightforward: in strategic fields (defence, energy, health) that require coordination of actors and resources to move from fundamental research to the deployment of breakthrough technologies (such as mRNA vaccines), a central institution allocates public funds and hires project leaders from universities or industry for limited periods, each with a precise mission. These leaders are given full latitude to enlist competing public or private laboratories to achieve their objectives.

This governance model reconciles industrial policy with competition policy, recognising competition as crucial for driving breakthrough innovation. Lacking such a framework, European industries, especially – but not only – in defence, suffer from a lack of competition and consequently fail to innovate sufficiently at the technological frontier.

The September 2024  by former European Central Bank governor Mario Draghi strongly favoured the idea of developing a European ARPA-type agency to support the transformation of scientific knowledge into breakthrough innovation. As Draghi rightly noted, the  (EIC), which is tasked with identifying and helping scale-up useful new technologies, lacks the scale and the range of expertise necessary to make strategic decisions in highly specialised fields. The , which provides grants for tech research, should be less bureaucratic and should be endowed with substantially more resources to become a genuine ARPA-type agency that will support high-risk projects with the potential to deliver breakthrough technological advances.

The European Commission should include this idea when it makes legislative proposals, , for the next EU framework programme – the EU’s overarching research funding instrument. In particular, as suggested by Draghi, more money should be allocated to financing disruptive innovation, which currently only receives 5% of the resources. Rather than primarily benefitting mature companies, the programme should aim to support young innovators. Its governance should be redesigned to put in place faster and less-bureaucratic procedures, with projects being selected through evaluation by leading experts, as is already the case for activities managed by the European Research Council, which supports fundamental research.

The EU has a security problem, but the issue is far broader than its defence capability. It is also a matter of economic competitiveness and the innovation gap with China and the US. New defence spending must be accompanied by a major shift to a more innovative EU.